Coordinated Systems Proliferate

If you thought the future of the pork industry was headed the way of vertical integration, think again.A new look at industry trends shows vertical integration is not the future for pork production. And neither, rightly or wrongly, is independent pork production the future.Instead, a new twist to production has flourished and seems destined to dominate the business. This twist includes many types

Karen McMahon | Aug 01, 1998

If you thought the future of the pork industry was headed the way of vertical integration, think again.

A new look at industry trends shows vertical integration is not the future for pork production. And neither, rightly or wrongly, is independent pork production the future.

Instead, a new twist to production has flourished and seems destined to dominate the business. This twist includes many types of producers in partnerships with everyone from their feed dealer and veterinarian to packers and processors.

"Just 3-4 years ago, a lot of people said the industry will go total, vertical integration," recalls Chris Hurt, Purdue University agricultural economist. "They said there was no hope. Pork would follow the poultry model.

"Well, that's not where the action has been in the last 2-3 years," he continues. "What's happening is producers are beginning to form groups and work with other people."

Hurt developed a table to show what he is talking about. Table 1 on page 46 provides some examples of the wide varietyof production methods now operating in the U.S.

At the top is the traditional, independent producer. And at the bottom is the total, vertically integrated producer with ownership from production through processing.

Between those two methods, coordinated production systems proliferate. >From the heady growth of these methods, Hurt believes many producers have learned to embrace change.

"We've been through enough of this change," he says. Now, producers who plan to stay in business are making the changes necessary to ensure their future.

"We are going to see all these people forming up systems and then we will see linkages of these people," Hurt says. "It is happening today. That's the direction we see things going."

Hurt believes many of the systems shown in the table will form the basis of future pork systems. From these and new ones expected to develop in the next few years, Hurt estimates 15-25 pork systems will dominate in the year 2005.

"Many of you producers will be operating within one of these pork systems," he adds.

After 2005, Hurt believes the pork systems will begin consolidation. And in 20 years, the systems will be competing worldwide.

Coordinated Groups Hurt identifies eight types of coordinated groups now raising hogs in the country, as shown in the table. They include:

Family Farm Cooperatives or Corporations - Hogs are produced in jointly owned facilities in these types of organizations. Usually, producers buy shares in the unit, which may include sow units, gilt multiplication or nurseries.

Veterinarian Clinic Directed - The key facilitator in these operations is a veterinarian or clinic. The Pipestone System, Pipestone, MN, is one example. Producers own the units, invest in sow and/or nursery units and feed nursery and/or finishing hogs on their own farms. These types of groups are particularly common in Minnesota and Iowa.

Feed Company Directed - "Feed companies are not lying down and saying, 'Oh well, I guess (the hog business) is gone.' They are raising their hands and saying they're going to find a way to be a part of this industry," Hurt says.

Feed companies have developed programs to help their customer base expand and evolve in the hog business, he adds. Most of these programs tie product purchases to consulting and planning services to financing alternatives.

Some feed companies also coordinate hog contracting programs. In some of these programs, the producer provides facilities, labor and management while the feed company supplies feed, hogs and support services. Other feed companies sell the weaned or nursery pigs to the producers.

Hurt notes there is a wide variety of programs and options available to producers.

Regional Cooperative Directed - Most of the cooperatives have developed programs where the producers own the pigs, but the cooperatives facilitate the production.

Genetics Company Owned - Genetics companies also have entered into the pork chain concept. They either own the production system or direct the production with producers who own the hogs.

Feed Company Owned - Several major feed companies also are major pork producers.

Mega Producer-Packer Aligned - Alliances between mega producers like Murphy Family Farms and packers like Smithfield Foods is one of the coordination methods showing large growth.

The mega producers don't own the packing/processor company, but form tight agreements with them.

Total Vertical Integration - Little change in this category has occurred in the past few years. In fact, some problems in this area highlight the difficulties of a firm becoming totally integrated. Hurt notes that Tyson Foods tried getting into the packing/processing end but sold their pork packing interest.

Premium Standard Farms, Princeton, MO, now owned by Continental Grain, went through bankruptcy.

Hurt does not expect large growth in this category.

Coordination Goals The overall goal of a coordinated system is to drive costs lower while providing the greatest pork value, Hurt says. Important to this goal is accessing technology for better efficiencies, lower production costs and improved consistency.

Accessing markets also plays a big role in coordination. Hogs are pooled to gain volume and consistency premiums. Producers also gain a certain amount of marketing expertise when the system is managed for them.

Other important factors are accessing information, capital, economies of scale and sharing risk.

Future Planning Producers not involved in some coordinated system might want to take a look at them, Hurt suggests. If you do, be sure to ask these questions:

* What can I gain?

* What attributes in my business am I weak on?

* Can I get information in the system?

* Can I get technology in the system?

* Can I get funding in the system?

* Can I get the opportunity to focus and intensify my management in a system, and focus on just a certain part of my business?

"Change is a scary time," he adds. "And having some hands to hold as we go through change can be good."

Hurt also reminds producers that, "It is important to get our attitude in the direction of change. If we align our business in the direction of change, then that change becomes an opportunity instead of a threat. It is so much easier to float downstream than to paddle against the current.

"Periods of change provide immense progress for those who move in its direction," he says. It also provides "decline for those who fail to recognize change and alter their course."